7 factors to consider before becoming a landlord
NEW YORK (2/2/16)--Becoming a landlord can be a profitable move, according to the online real estate site Trulia, but, it’s not a passive investment--it’s a small business. Take on the commitment only after you’ve given it careful consideration and research (CBS MoneyWatch Jan. 25).
Here are 7 factors to consider when renting your property:
Costs: Calculate the costs of insurance, taxes, a mortgage if you have one, water, garbage, gardening, regular repairs and upkeep, and regular deposits into a reserve fund for unexpected expenses and big-ticket items.
Plan for annual costs (not including your mortgage) to run between 35% and 45% of your yearly rental income. If you decide to hire a management company, look at the services it offers, how much it will charge you, and adjust your spending plan accordingly.
State and local laws: Some zoning ordinances or homeowners and condo associations won't allow properties in a certain area to be used as rentals, or may cap the percentage of units that can be rented out. You might be required to pay special fees or taxes on rental properties, or have to undergo regular inspections.
Some communities have laws regulating tenants' and landlords' rights and responsibilities and dictate what must be covered in your rental agreement. If you use an online resource that offers rental agreement templates, make sure it follows your state's guidelines.
Legal advice: An attorney who specializes in real estate can help make sure your rental agreement is valid and meets all the state and local requirements. Save yourself thousands of dollars in lost rental income by having an attorney lined up in case you need to take a tenant to court.
Property maintenance: Have a relationship with a trusted repair company so that you’re ready when something breaks. Many landlords put the responsibility for mowing on their tenants, but if you have a lawn service take care of your property, you have better control over the quality of workmanship.
Tenant screening: Have a process in place to run credit and background checks on all adults who will be living in your property. Look at monthly income to make sure your tenants can afford to pay rent--it should be two or three times the rent payment.
Tenant problems: When they move in, go over the condition of the property and appliances with your tenants and have them sign an agreement. Include in your rental agreement the penalties you can impose if a tenant violates any part of the agreement.
- Rent collection: Make it as easy as possible for your tenants to pay rent. Look into giving them the option to make electronic payments. Some companies, such as Cozy, ClearNow, Rentec Direct and RentPost, offer free online platforms for collecting electronic payments and managing the finances for your properties.
For related information, read “Make the Move to Small-Business Ownership” in the Home & Family Finance Resource Center.